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Five things to consider when drafting a Commercial Contract

Galadari Advocates & Legal Consultants has contributed the SCT campaign with the following article:

When entering into a Commercial Contract it is important for small businesses to keep in mind some key considerations in order to minimiseany risk to your business and to protect your position in the event things do not go to plan. Thinking ahead about what could go wrong and addressing these issues at the very beginning could save time and money later on.

Set out below are five of these key considerations to help you when you are drafting or considering a commercial contract.

1. Who you are contracting with?

Do your due diligence and background checks when entering into a contract. Identify the parties to the contact and ascertain their legal status, for example are they aLimited Liability Company or a Partnership? Obtain signatures from the appropriate person with authority to bind and make sure the party with whom you are contracting is in a good financial position.

2. Scope and Requirements

A contract must accurately reflect what the parties have agreed and should therefore document a “meeting of minds”. Ideally it should set out clearly what the parties’ objectives are. Understanding what the contracting parties are contracting about is fundamental for a commercial contract. The parties should be clear as to their obligations and should explicitly set out any representations and covenants. Ambiguity leads to confusion, misunderstandings and to the parties coming to different conclusions.

3. Financials

Payment terms are paramount. The parties should be clear as to the amount to be paid and when and what remedies the parties will have in the event of default. What is included and excluded from the price? What is the process for disputing invoices? In what circumstances could a supplier suspend supply? What if the goods are supplied late?Will the other party be entitled to payment of a penalty?

4. Confidentiality and Intellectual Property (“IP”)

If there are things that you would not wish the wider business community to know but which it essential to share with the contracting party then you should ensure a confidentiality clause prohibits the disclosure of confidential information. There should be a clear stipulation of the available remedies in the event that there is a breach of confidentiality. It will also be important to document who owns any IP if the contract will create IP and to ensure that the obligations and restrictions of its use are included within the contract.

5. Termination and Dispute Resolution

Think about the termination provisions relating to the contract. Sometimes a party may want to get out of a long term, one sided contract. Consider whether the term is too long or too short. Is there an appropriate notice period? A party may be defaulting on the terms of the contract and in this scenario you might want to include a mechanism whereby the other party can terminate the contact and seek damages ifloss has been incurred. There should be specific events that allow parties to terminate the contract.

It is also very important to determine which law will govern the relationship of the parties and which court will have jurisdiction to deal with any dispute should one arise. If the parties are familiar with the English common law and feel more comfortable with this they might want to agree to the DIFC Law and the DIFC Courts having jurisdiction to deal with the resolution of any dispute.

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